Unexplained wealth orders: an effective tool in the fight against financial crime or a busted flush?

Contributor, Daniel Gamsakhurdia analyses the effectiveness of Unexplained wealth orders in reducing financial crime and the laundering of illicit capital flows.

London, one of the world's great international cities, is home to countless nationalities, a thriving financial sector and a diverse cultural scene. It also has a more sinister side; a property market well known as one of the world's prime destinations for foreign politicians, dignitaries and businessmen to stash their ill-gotten gains.

A recent study by Global Witness stated that over 87,000 properties in the UK are owned by anonymous companies registered in tax havens, with a combined value of over £100bn. Over 40% of these properties are in London and properties on Buckingham Palace Road alone are valued at £350m. While many of these may be owned legitimately and fairly, reports from the Land Registry and Metropolitan Police found that 75% of properties whose owners are under investigation for corruption made use of offshore corporate secrecy to hide their identities.

The owners of these properties come from all corners of the world; African oil barons, Brazilian businessmen and Pakistani property tycoons, not to mention Russian oligarchs who made their money in the 1990's and continue to conduct business by dubious means.

Journalists, investigators and human rights advocates have contributed to growing criticism of the UK government's 'blind-eye' to the waves of foreign corrupt money entering the capital, resulting in politicians and law enforcement finally taking this problem seriously. A series of Foreign Affairs Select Committee sessions in 2018 were dedicated to Russian corruption in the UK and recent draft legislation proposes to register all foreign-owned property in the UK to combat the exploitation of loopholes.

Yet the most high-profile scheme is the establishment of the Unexplained Wealth Order (UWO), introduced in 2017, that allows the authorities to target assets of those they view as suspicious. A new tool in the fight against organised crime, the UWO can be utilised to catch international criminals, freezing the properties of individuals who, on paper, should not be able to afford to own them.  UWOs aim to uncover the potential corruption of 'politically exposed persons' (PEPs) outside the EU, and serious crime suspects both from UK or abroad.

The High Court can grant the order on the basis of three criteria; that there are reasonable grounds for suspicion of the individual, a clear inconsistency in their apparent legal income and their visible assets in the UK, and an asset value of greater than £50,000.

In 2017 the law was lauded as a triumph in exposing serious criminals and corrupt officials in the UK and from other jurisdictions. It was heralded as the most effective way to pursue criminal assets and prevent the economic and social damage created by the laundering of illicit funds through the property market.

Two years on, the question remains, how successful have UWOs been in actually reducing financial crime and the laundering of illicit capital flows?

The first and most famous UWO in the UK is the well-publicised case of Zamira Hajiyeva, the wife of Azeri banker Jahangir Hajiyev, jailed in his homeland in 2016 for 15 years for embezzlement. Zamira's lavish spending in London — including a £16m bill at Harrod's over a decade — was laid bare by the UWOs secured against her London properties. If she fails to explain the source of her wealth to the High Court, she risks losing her £15m home in Knightsbridge and a Berkshire golf course.

Yet despite this high-profile case, the use of UWOs has been more limited than many hoped. So far, the UK has issued only 15 UWOs in four cases, two of which relate to PEPs and two to serious and organized criminals, against a mere £115 million worth of assets.

 By any estimation, this looks paltry in comparison to the £100bn worth of offshore properties that could be worth investigating.

For an agency that has heartily advocated for UWOs, the National Crime Agency is not rushing to the courts to seek their use on a regular basis. Nor are any other of the other agencies that are authorised to apply for them including the Financial Conduct Authority, HMRC and the Serious Fraud Office.

While the use of UWOs may be restricted, the list of potential targets is not. London is awash with individuals with opaque sources of income. In August of this year, Finance Uncovered revealed Isobel dos Santos, daughter of the former Angolan president, as the ultimate owner of a £13 million mansion in London. The son of the former president of Kyrgyzstan, Maxim Bakiyev, allegedly lives in a £3.5m Surrey mansion with a bar and cinema. Bakiyev is wanted on corruption charges in his own country, and his property was bought through Limium Partners, a Belize registered company.

Convicted criminals are also not being examined. Sergei and Vladimir Makhlai, a father and son duo based in London and the USA have been convicted of large-scale economic fraud and mismanagement during Vladimir's time as Chairman of Russian fertilizer giant TogliattiAzot. They are rumoured to have numerous addresses in the capital. TogliattiAzot's former CEO Yevgeny Korolyov, a key part to the fraud and another convict, is also living in quite some comfort within walking distance of the Russian church in Knightsbridge. There are dozens more examples of suspected criminals, businessmen and politicians alike, using London as their hideout and haven for their ill-gotten riches. What is staggering on the above examples is that even with a web of offshore vehicles uncovered in the Mossack Fonseca leak, no questions are being asked of these individuals.

There is no doubt that UWOs have the potential to deter those looking to launder money in the UK, but it is safe to say that their potential remains largely untapped. If the British government is to counter the narrative that the introduction of UWOs was merely a ploy to be seen to acting decisively against international money laundering, they clearly need to work harder. Pressure is growing; Transparency International's 2018 Corruption Index saw the UK lose its position in the top 10 nations for combatting corruption.

Undesirable developments such as this, made more acute by the UK's urgent need to promote itself as an attractive location for global investment post-Brexit, are likely to concentrate minds in government and law enforcement on how best to demonstrate the UK's commitment to clean investment.

For far too long, too little has been done to take on corporate fraud in the UK and continuing scandals result in international reputational damage for Britain. If the UK is to repair its dented reputation, the government needs to use UWOs more effectively. It must demonstrate that if individuals launder the proceeds of ill-gotten gains in the UK, the result will be asset seizure and public exposure. So far this has yet to occur on any meaningful scale.